The IRS has released the following details regarding relief for Schedule K-2 and K-3 reporting.
The IRS (has) provided further details on additional transition relief for certain domestic partnerships and S corporations preparing the new schedules K-2 and K-3 to further ease the change to these new schedules. Those eligible for the relief will not have to file the new schedules for tax year 2021.
The new schedules K-2 and K-3 improve reporting by standardizing international tax information to partners and flow-through investors, making it easier for them to report these items on their tax returns. In addition, the changes ease flow-through return preparation compliance by clarifying obligations and standardizing the format for reporting.
Notice 2021-39 provides penalty relief for good-faith efforts to adopt the new schedules. Today’s transition relief, appearing in new frequently asked questions on Schedules K-2 and K-3, allows an additional exception for tax year 2021 filing requirements by certain domestic partnerships and S corporations.
The IRS is providing an additional exception for tax year 2021 to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations. To qualify for this exception, the following must be met:
- In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates or foreign trusts.
- In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated or may reasonably expected to generate foreign source income (see section 1.861-9(g)(3)).
- In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto): (a) Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and (b) Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
If a partnership or S corporation qualifies for this exception, the domestic partnership or S corporation does not need to file Schedules K-2 and K-3 with the IRS or with its partners or shareholders. However, if the partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete their tax return, then the partnership or S corporation must provide the information to the partner or shareholder. If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the conditions for the exception are not met and the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.
The IRS welcomes additional comments on Schedules K-2 and K-3. This feedback and inquiries can be sent to firstname.lastname@example.org.
Related resources from the AICPA
The AICPA has developed the following resources related to IRS Schedules K-2 and K-3:
- Schedules K-2 and K-3 guidance and resources: These resources will help you advise clients on Schedules K-2 and K-3, which are used to report items of international tax relevance from the operations of pass-through entities.
- Schedules K-2 and K-3 client information letter (AICPA members only): Notify your clients about the new reporting forms and advise them to contact you with questions.